Economics Uncovered and The Termite Scenario

In a world where money is everything, we should have an understanding of how economics works. We are bombarded with explanations of economics and made to feel we either support the current economic rules or we are socialists, communists or terrorists.

Firstly, here are the fundamentals:

INFLATION, we are told ad nauseum, is good. The fact that prices are on the rise is apparently a sign that our economy is healthy.

DEFLATION is bad. If prices go down our economy must be unhealthy.

ECONOMIC POLICY establishes a preferred rate of inflation so we can all be happy when prices go up.

ECONOMIC DATA measures a nation's success. Success is not measured by the wealth or well being of its total population but by how much profit it makes, exactly like a corporation. Employees (population) are not important, the share price (economic indicator) is.

This is what they teach us from the day we start consuming. Inflation is good. Deflation is bad. We are assured that our wages will also increase and therefore we are all better off and we should rejoice because prices are rising. But who really benefits from price rises? The investors, the corporations, the wealthy. They are the ones that are upset when inflation is only 1.7% instead of the forecast 2%. Their money isn't earning them as much as they want but we, the ordinary folk, buy into this charade and agree that we need inflation. Why? Because that is what we are told. Inflation is good.

So with the rising prices, the consumer must pay more to get the same amount. This year in the US inflation is around 1.7% which means that we have to pay an extra 1.7% of our wages to simply stay the same. This is of course offset with the promise that inflation translates into higher wages. Really? Has everyone received their 1.7% increases so far?

Let us assume for the moment that everyone has received their 1.7% wage increase to offset the 1.7% inflation. This gives us a total gain of Zero. We are in fact no better off than if we had zero inflation and zero wage growth. So why don't we aim for that? Because, they tell us, a "healthy economy" must have inflation. If you repeat something often enough it must be true, right?

The facts are simple. Inflation creates a never ending cycle of price increases and the promised catch up wage increases (always paid well in arrears if at all). Prices go up then wages go up. The circle of economics continues.

It is not that long ago that many Governments of the West actually controlled pricing. They had (and still do have I believe) the authority to fix prices so that the people were not disadvantaged by the greed of corporations. Milk, bread, electricity and other essential items had their prices controlled by the Government. Today this is considered interference. The share market is the saviour of mankind and must be left to rise and rise. The market apparently will control itself and prices will fall due to factors such as competition and productivity. Unfortunately, competition does not exist in its purest form any more and productivity is reduced to mergers, acquisitions, moving operations to a third world country, cutting jobs and slashing wages.

Understanding The MARKET

Here is a sad fact. When a large corporation announces major job cuts, the Market reacts positively and the share price increases. This works in the vast majority of cases because the Market assumes that costs of that corporation will be reduced which will therefore increase profits. The corporation must have a good business plan because they can apparently produce the same amount with less people. The fact that the remaining employees will have to work more hours for the same money is considered as a positive by the Market.

The Market has no social conscience and no long term plan. The Market exists for one purpose and one purpose only - to make money. If fracking destroys a country the Market simply sells those shares and invests elsewhere. Once the forests have been completely destroyed those shares are sold and shares are bought in another sector. If a nuclear reactor goes critical, destroying land, lives and poisoning ocean life the Market will simply divest those shares and invest in fossil fuels. The Market has a very short term outlook and does not care about any implications unless they are monetary. The planet's sustainability and the population are not considered by the Market. The Market cares about gains. The Market likes inflation. The Market hates deflation.

The Market also likes new things and will invent complicated new products and strategies to entice folk to buy, invest and gamble. Remember Derivatives? These are the things that no one really understands but at one stage they were considered by the Market as a solid investment. Now, post GFC, they are considered risky. Still, no one knows what they really are. But there are other products now that we can gamble on, I mean invest in. Such products as:

Futures and options

Warrants

Contracts for difference

Stapled securities

Collateralised debt obligations

Hybrid securities and notes

Carbon trading

These products are continually being invented to entice money into the Market because the Market has an insatiable hunger and unrealistic growth expectations. It is like a termite, eating its own home, knowing that one day their home will be hollow and on the brink of collapse but still eating, eating and eating without a care for consequence.

Meanwhile, inflation continues to generate an ever widening gap between the rich and poor. That was the plan all along. It is the secret behind economics that the vast majority of the population don't see. A cycle of rising prices and delayed wage increases benefits the Market and yet we all nod our heads at the finance reports when they say that we should be aiming for 2% annual inflation and the market is growing - like that is a "good" thing.

Some call it Economics 101. I call it one of the biggest scams in history.